Fed says it will provide financing against new U.S. 'payroll protection' loans

WASHINGTON (Reuters) - The Federal Reserve on Monday moved to bolster a new small-business lending program by allowing banks to turn those loans over to the U.S. central bank for cash, easing concerns among banks about getting stuck holding the low interest loans.

The Fed said it would announce details later this week of a new term financing arrangement for loans made under what is known as the Payroll Protection Program, part of the federal response to the economic effects of the coronavirus pandemic.

Term financing facilities have been a staple of the Fed’s crisis response, encouraging banks to make loans for a variety of purposes with the understanding that they could turn them over to the central bank, get cash and continue lending.

The program is similar to the arrangement the U.S. government has with mortgage agencies like Fannie Mae and Freddie Mac, whose stamp of approval on a loan makes banks more willing to lend.

In this case the very existence of the Fed program - assuring banks they could unload the Small Business Administration loans when they want - could make the program more attractive to lenders, given the fees of up to 5% banks can earn for what now amounts to processing the paperwork.

The Payroll Protection Program is one of the key measures adopted as part of a more than $2 trillion effort to offset the economic impact of the coronavirus crisis, which has forced large portions of the U.S. economy to shutter. It dedicates $350 billion for loans so small businesses can keep paying workers and meet basic expenses like rent.

The rollout of the program has been fitful, however. Some bankers have said they remain unclear about their potential risks if the loans go bad - even though the Treasury Department has said it would guarantee them in most instances. Bankers also have been concerned about holding onto the 1% interest loans even though the Treasury last week said they could be sold back to the SBA after seven weeks.

The Fed is working on a separate Main Street Lending Facility expected to focus on mid-sized employers with between 500 and 10,000 workers.

Fed Chair Jerome Powell is to provide an update on the economy on Thursday in a webcast speech hosted by the Brookings Institution, a Washington-based think tank.

Reporting by Howard Schneider, Editing by Steve Orlofsky, Will Dunham and Sonya Hepinstall